Puerto Rico Plans First New General-Obligation Sale Since 2008

Puerto Rico, a U.S. territory with a credit rating lower than any state, plans to sell its first general-obligation bond not earmarked for refinancing in more than two years, said Carlos Garcia, president of the Government Development Bank.

The Caribbean commonwealth will decide the amount and timing of the sale in “the next weeks,” Garcia said in an interview yesterday in San Juan, the capital. Puerto Rico also intends to sell as much as $2.1 billion of other bonds next year, said Garcia, who heads the government’s borrowing authority.

“It will be for infrastructure, for projects of significance,” said Garcia of the general-obligation sale. “We have not decided on the whole plan.”

Standard & Poor’s revised its outlook on Puerto Rico’s general-obligation credit to positive from stable in November, saying cost cuts and measures to collect more revenue may help balance the government’s budget “within the next two years.”

Governor Luis Fortuno, the first Republican governor elected in 40 years, inherited a $3.3 billion budget gap when he took office in January 2009. He has cut 23,000 government jobs, reduced expenses almost 20 percent and stepped up enforcement of tax collections, according to the development bank. The government estimates a deficit of $1 billion in the current fiscal year, which ends June 30, Garcia said.

Frozen Out

S&P rates Puerto Rico’s general-obligation debt BBB-negative, the last level before higher-risk non-investment grade. Moody’s Investors Service has a negative outlook on the debt and rates it A3, three levels from non-investment grade.

With the low ratings effectively freezing Puerto Rico out of the credit markets, the Legislature created the Sales Tax Financing Corp. in 2006 to sell revenue-backed debt for the government and to service existing bonds. Debt of the corporation, known by its Spanish acronym Cofina, is rated AA-negative by S&P and A2 by Moody’s.

Puerto Rico sold general-obligation bonds last year to refund outstanding debt. It last issued general-obligation bonds that weren’t used for refunding with a $250 million sale in September 2008. The debt is exempt from federal and state taxes.

A 6 percent security maturing in 2038 was sold at a price of 103.8 to yield 5.5 percent, about 1.1 percentage points more than 30-year U.S. Treasuries at the time. It traded on Dec. 23 to yield 6.1 percent, 1.6 percentage points more than similar Treasuries, according to data compiled by Bloomberg and the Municipal Securities Rulemaking Board.

Refunding Debt

In addition to the new-money general-obligation debt, Puerto Rico intends to sell from $1.8 billion to $2.1 billion of other bonds in 2011, Garcia said in the interview. About half the sales will be to refund existing debt, including $530 million of outstanding general obligations and $420 million of building-authority securities, he said.

The territory will also sell $145 million to $395 million of revenue bonds for the electric authority’s capital-improvement plan and a natural-gas project, Garcia said.

It also plans $756 million of qualified school-construction bonds, which receive a 100 percent federal interest-cost subsidy under the American Recovery and Reinvestment Act, he said.

“We’re taking full benefit of the ARRA program,” said Garcia. “The cost of it is substantially lower than what the private sector could do.”

Puerto Rico, a U.S. territory with a credit rating lower than any state, plans to sell its first general-obligation bond not earmarked for refinancing in more than two years, said Carlos Garcia, president of the Government Development Bank.The Caribbean commonwealth will...